Wedbush Securities Settles SEC Charges that it Failed to Comply With the Customer Protection Rule
Feb. 5, 2018
February 5, 2018 - The Securities and Exchange Commission today announced settled charges against Wedbush Securities Inc. (Wedbush), a registered broker-dealer and investment adviser headquartered in Los Angeles, California, for violation of the Customer Protection Rule between September 2014 and January 2015.
Section 15(c)(3) of the Securities Exchange Act of 1934 (Exchange Act), and Rule 15c3-3 thereunder, known as the Customer Protection Rule, requires broker-dealers to safeguard the cash and securities of their customers so that customer assets can be promptly returned if the firm fails. In order to do so, a broker-dealer is required to periodically calculate the net amount of cash it owes its customers, and deposit that amount into a segregated bank account known as the Reserve Account.
According to the SEC’s Order, between September 2014 and January 2015, Wedbush’s weekly calculations to determine the net amount that should have been deposited into the Reserve Account included a significant error, resulting in weekly Reserve Account deficiencies ranging from approximately $10 million to $193 million. When the error was uncovered, Wedbush was required to immediately deposit an additional $133 million into its Reserve Account, which created a significant liquidity challenge for Wedbush. Wedbush’s failure to properly fund its Reserve Account also caused it to violate certain recordkeeping and reporting requirements, because it included inaccurate information in its Financial and Operational Combined Uniform Single Reports (FOCUS Reports).
The SEC’s order instituting a settled administrative and cease-and-desist proceeding finds that Wedbush violated Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder, and Section 17(a)(1) of the Exchange Act and Rule 17a-5(a) thereunder. Without admitting or denying the SEC’s findings, Wedbush consented to a cease-and-desist order, a censure, disgorgement and prejudgment interest of $304,197, and a civil penalty of $1,000,000. In addition, Wedbush has undertaken to hire an independent compliance consultant to review the firm’s controls and procedures, corporate governance, and culture of compliance related to several broad areas, including the Customer Protection and Net Capital Rules, liquidity, the opening of certain types of new accounts, internal audit, and risk management. In a related matter, Wedbush also agreed to pay a $1,500,000 fine to the Financial Industry Regulatory Authority.
The SEC’s investigation was conducted by Sara Kalin and Marc Blau of the Los Angeles Regional Office. The SEC examination that led to the investigation was conducted by Thomas Martinsen, Kent Woo, and Cindy Eson. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.
See also: Order